The reaction to the financial crisis of 2007-8 was to enact the Dodd-Frank Act, on the premise that where regulation had failed, the cure must be ever more regulation. It asks agencies to enact 243 rulemakings and engage in 67 studies to enable more. The Act is 848 pages of impenetrable delegation, over ten times the length of New Deal banking acts.

The principal issue is, does all that get us anything? Are we and the banking industry safer for all that? Let's see what England's top regulator has to say about his country's and the U.S. regulatory efforts. But let's start with what "The Bumbling Colossus" has to say:

On page 43 at
footnote 18 of The Bumbling Colossus, the author states that "The
Dodd-Frank Act totally missed the cause of the financial crisis and
compounded woes by heaping unneeded regulatory burdens on an already
overregulated financial sector." This view is repeated, TBC at 59.

Now
from the regulator's perspective -- the inside, so to speak -- we hear
the same thing.

On August 31, 2012, England's top regulator, Andrew Haldane, Exec
Director, Financial Stability, Bank of England, and Vasileios Madouros,
economist, Bank of England, published a paper (given as a speech by
Haldane at the Federal Reserve Bank of Kansas City's symposium) entitled
"The Dog and the Frisbee". Their views (from the inside) dramatically underscore the points made in "The Bumbling Colossus".

This paper is worth reading in entirety,
http://www.bankofengland.co.uk/ publications/Documents/speeches/2012/
speech596.pdf. But here are a few nuggets:

On Rule Prolixity and Burdens: "As of July this
year, two years after the enactment of Dodd-Frank, a third of the
required rules had been finalised. Those completed have added a further
8,843 pages to the rulebook. At this rate, once completed Dodd-Frank
could comprise 30,000 pages of rulemaking. That is roughly a thousand
times larger than its closest legislative cousin, Glass-Steagall.
Dodd-Frank makes Glass-Steagall look like throat-clearing."

"The density and complexity of financial regulation has had predictable consequences for the scale and scope
of regulatory resources. One metric for that would be the number of
human resources devoted to financial regulation. ... The FDIC and SEC
wereset up as part of the regulatory response to the Great
Depression. In 1935, together with the OCC and supervisors housed in
the Federal Reserve banks, they had combined regulatory resources of
around 4,500 people. There was one regulator for every three banks in
the US (Chart 2). Today, the combined regulatory resources of the FDIC,
OCC, Federal Reserve banks and SEC is closer to 18,500 people. That is
three regulators for every US bank"

"As numbers of regulators
have risen, so too have regulatory reporting requirements. .... The
Federal Reserve Act of 1913 required all state-chartered member banks to
file reports with the OCC and in 1917 responsibility for collecting
these passed to the Federal Reserve. By 1930, these reports might
contain around 80 entries. Today, regulatory reporting is on an
altogether different scale. Since 1978, the Federal Reserve has
required quarterly reporting by bank holding companies. In 1986, this
covered 547 columns in Excel, by1999, 1,208 columns. By 2011, it had
reached 2,271 columns. Fortunately, over this period the column
capacity of Excel had expanded sufficiently to capture the increase. "

And this is Just the Beginning: "Dodd-Frank
rulemaking in the 12 months after its enactment covered thirty new
rules or less than 10% of the total. A survey of the Federal Register
showed that complying with these new rules would require an estimated
2,260,631 labour hours every year, equivalent to over 1,000 full-time
jobs. Scaling this up, the compliance costs of Dodd-Frank will run to
tens of thousands of full-time positions."

"Of course, the costs
of this regulatory edifice would be considered small if they delivered
even modest improvements to regulators’ ability to avert future
financial crises. The public policy question is – will they? In
financial regulation, is more more or is more less?"

The Costs of Regulation Outweigh the Benefits:Haldane
& Madouros' answer to whether the rules will improve things, building upon numerous complex statistical analyses, is
"no", this regulatory explosion will NOT reduce risks, but rather will
increase them.

"In forgone output, financial crises can be as
costly as wars. The public policy issue, then, is whether the war on
crises is best waged with the weapons of the past. Einstein wrote that:
“The problems that exist in the world today cannot be solved by the
level of thinking that created them”. Yet the regulatory response to
the crisis has largely been based on the level of thinking that created
it."

"The Tower of Basel is underpinned by three pillars: Pillar
1 (regulatory rules); Pillar 2 (supervisory discretion); and Pillar 3
(market discipline). To date, the weight borne by these three pillars
has been heavily unbalanced, with most of the strain taken by Pillar 1.
Simplifying Pillar 1 rules would help rebalance the Basel scales. That
would not only strengthen Pillar 1, but could simultaneously strengthen
Pillars 2 and 3. A rebalancing away from prescriptive rules provides
greater scope for supervisory judgement, Pillar 2."

The Comparison with Medicine and Health Care: "In other
professions, such as medicine, prescriptive rules have generated a
wood-from-trees problem. They have also caused defensive,
backside-covering behaviour. Both may have increased risk in the
system. What is true of doctors is almost certainly true of bank
supervisors. In the pre-crisis period, being required to monitor many
small, rule-based risks may have caused supervisors to overlook
potentially life-threatening ones. This ticked-box approach failed to
save the banks, just as in medicine it fails to save lives. Supervision
suffered the same fate as the autistic savant – penny-wise but
pound-foolish. Breaking free of that psychological state calls for a
fresh approach, one which is less rules-focussed, more judgement-based. "

Dependency and Loss of Initiative: On
page 49 of The Bumbling Colossus, note is made of the tendency
over-detailed regulation has to create dependency and lapse in
independent judgment. The Haldane report points out that the same thing is
true of financial regulators as it is of doctors:

"There is a
final, related but distinct, rationale for simple over complex rules.
Complex rules may cause people to manage to the rules, for fear of
falling foul of them. They may induce people to act defensively,
focussing on the small print at the expense of the bigger picture.
Studies of the behaviour of doctors illustrate this pattern (Gigerenzer
and Kurzenhäuser (2005)). Fearing misdiagnosis, perhaps litigation,
doctors are prone to tick the boxes. That may mean over-diagnosing
drugs or over-submitting patients to hospital. Both are defensive
actions, reducing risks to the doctor. But both are a potential health
hazard to the patient. For example, submitting patients to hospital
increases significantly their risk of secondary infection. Hospitals
are, after all, full of sick people. Doctors unencumbered by a complex
rulebook will have fewer incentives to act defensively. They may also
be better able to form their own independent judgementswhen diagnosing
medical problems, using their accumulated experience. That ought to
more closely align a doctor’s risk incentives with their patient’s. The
same is likely to be true of other professions, from lawyers to
policemen to bank supervisors."
For the entirety, go to: http://www.bankofengland.co.uk/ publications/Documents/speeches/ 2012/speech596.pdf